Tag Archives: UI

The good: a doubling of the state’s Rainy Day Fund and end to the estate tax. But a big controversy surrounds the legislature this week. Lawmakers decided to cut unemployment benefits by one-third. This move disqualifies the state from receiving additional emergency unemployment insurance funds from the federal government, affecting 170,000 jobless in the state.

The issue points to the perennial calls for reform to the federal-state Unemployment Insurance (UI) program. North Carolina is one of many states that must pay the federal government back what it has borrowed to offer extended benefits to its residents, or face higher payroll taxes. Their choices are tough ones to make: raise the state payroll tax (or taxable wage base) and replenish the trust fund – which has its own effects on the economy and the workforce – or cut benefits. A better solution is to re-think our approach to social insurance, something economists, such as Harvard’s Martin Feldstein, have been highlighting the structural flaws of UI since the 1970s.

n.b. update: a reader rightly notes at the NYT – the states must pay back the money they’ve borrowed from the federal government to continue paying benefits. But they don’t have to pay back the temporary EUC program.

The Center on Budget and Policy Priorities has a new analysis highlighting the $35 billion bill that 20 states owe to the federal government for covering benefit extensions. The report points to one of the design problems with the current program. The joint federal-state unemployment insurance program (UI) is financed via a payroll tax. States have kept the tax too low and thus did not build up enough reserves in the UI fund to weather the recession. This isn’t the first time UI has run into this problem, in fact it’s a perennial issue. Alan Krueger of Princeton provides a summary of some of the structural weakness in UI, a program unchanged since the New Deal.

While it is widely recognized that UI is structurally broken, solutions vary considerably. In a paper for The Brookings Institute, Rosen and Kletzer suggest “strengthening the federal role” in UI that would require states to harmonize eligibility criteria and benefit levels, increased eligibility and benefits financed by a higher FUTA tax. In addition Rosen and Kletzer propose a wageloss insurance program for those who become employed at a lower wage than their previous job; and lastly private accounts for the self-employed.

The Tax Foundation proposes another set of fixes. These include loosening up restrictions in the program to allow states to experiment with alternative programs, as well as the establishment of individual accounts.

In September the Obama Administration proposed a ‘sweeping reform’ of the current program. Included was the wageloss subsidy for the employed. In last week’s SOTU the president stressed transforming UI into an employment program via job training services. But these new appendages avoid the problem that UI was created to address: how to smooth private consumption during times of temporary and involuntary unemployment?

On Monday, the Tax Foundation released a new study by Joe Henchman on Unemployment Insurance policies in the 50 states. The study highlights that while the federal-state program is supposed to be counter-cyclical, in reality states do not use periods of high growth to prepare their unemployment trust funds for recessions. At the beginning of 2008, most states were prepared to pay less than one year’s worth of high unemployment benefits, leading to quick insolvency for many states’ funds in recession.

In order to provide benefits, states have had to borrow from the federal government. Henchman explains:

Beginning on September 30, 2011, states must pay approximately $1.3 billion in interest on those outstanding balances; in many cases, businesses and employees in those states will also face increases in federal unemployment insurance tax rates as a result of those federal loan balances. These new interest obligations and tax increases, if they ultimately occur, come at a time when private sector hiring is already at a low level and states are under significant fiscal pressure. These unemployment insurance fiscal policies may exacerbate negative job growth and tax trends, instead of operating countercyclically as the program was intended.

The study also provides analysis of the different taxes and benefits across the states. The compilation of the variation of tax rates, duration of benefits, funding gaps, and other policy factors makes this paper an excellent jumping off point to look at state level reforms based on states that have performed relatively well in this program compared to the neighbors.

In a more ambitious policy proposal, Henchman recommends Individual Unemployment Benefit Accounts as an option for reform. These accounts, which Chile adopted in 2002, provide a measure of income stability during periods of unemployment. Unlike state-administered UI programs, though, private accounts do not carry the perverse incentives that may dissuade people from finding work while they are receiving these benefits because money which goes unused during unemployment can be accessed upon retirement. In 2010 Eileen Norcross and I did a brief analysis of the incentives that the current UI program provides and came to the same general policy recommendation.

It may seem like obvious policy for the federal government to extend unemployment benefits for a record fifth-time. It’s something they’re considering. But, as Emily Washington and I discuss in our recent Mercatus On Policy, expanding the current Unemployment Insurance (UI) program isn’t the best medicine for the economy or for the unemployed. UI has become an poor safety net. At worst the program actually helps to extend unemployment.

Now may be the time to start discussing another approach to helping workers weather recessions: Unemployment Insurance Savings Accounts. Chile did it in 2003. Rather than dedicating employer payroll taxes to a state-administered fund, states should let workers set up individual savings accounts. With contributions from both the employer and the employee, UISA’s are available to individuals when unemployment occurs, or can be converted into savings upon retirement.